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09/14/2008

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Andrew

If large bets were allowed, some wealthy groups may bet a lot on their candidates in order to exert bandwagon influences on public opinion through their large bets affecting market odds. If so, these markets likely would become less reliable as predictors of outcomes, and hence would have less influence on opinions.

Could that also be an argument for limiting bets in other types of prediction markets? Has the lack of limits in other markets had the effect you describe - making the markets less reliable and reducing their influence on opinion?

DanT

My theory is that voting markets model the costs of voting better than polls. People are far more likely to lie to a poll taker (of course I expect to vote, even though I never have), but you can't lie about placing a bet or not.

Home team bias is an effect which impacts both party candidates. In the absence of other effects, home team bias would make the predictions proportionate to the sum of the bettor's political parties. This is not seen in practice, so other effects must be included which describe why the betting market predicts voter behavior so well.

Voting results are known to be influenced by turnout, i.e. the people desiring to vote for a candidate are sufficiently excited about the candidate to incur the costs of voting.

The same mechanism could be at work in the betting market, i.e. the people desiring to bet on a candidate are sufficiently excited about the candidate to incur the costs/risks of betting.

Suppose a party member's "home team" candidate is not very exciting, so the party member is less likely to place a bet for him/her. The costs of placing the bet mirrors the costs of voting.

If this mechanism is at work, the size of the betting markets (number of bets, total value of bets) should correlate to voter turnout (number of registered voters, number of actual voters).

I hereby allow anyone to perform the follow-up research, attribution not required.

Robin Hanson

Your concluding paragraph suggests that manipulation attempts make the price less accurate. I have a paper forthcoming in Economica that says the opposite - manipulation attempts increase price accuracy.

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Jason Ruspini

One example of manipulation increasing accuracy is when someone bids up a default swap, helping to blow out a company's funding costs, driving them into bankruptcy. Ahem. But you were talking about a model result, and surely the assumptions of the model always hold. Surely.

Joe Cisewski

Hanson,

I doubt this is true in thinly-traded markets, but I am interested in finding evidence to the contrary. If there is such evidence, I would be very interested in hearing your thoughts on the reasoning behind it.

Thanks.

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